Vulture Investors and the Market for Control of Distressed Firms

Abstract

This paper investigates the role of external agents, known as vulture investors, in the governance and reorganization of a sample of 288 firms which default on their public debt. Vultures are frequently active on boards and in the management of target companies, and gain control of 16% of the sample firms, often through the purchase of senior claims. We find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Valuation effects are strongly dependent on the level of priority of the claim purchased, and are greater when the investor becomes CEO or Chairman or gains control of the target firm. We also find the improvement in post-restructuring operating performance relative to the pre-default level is positively related to the presence of a vulture investor in management of the target firm. The evidence suggests vulture investors add value by disciplining managers of distressed firms.

JEL Classification: G12, G14, G34